CH11 - 11-1Put and Call OptionsChapter 1111-2A call option is the right to buy an underlying security at an exercise(strike price during a stated

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Unformatted text preview: 11-1Put and Call OptionsChapter 1111-2A call option is the right to buy an underlying security at an exercise (strike) price during a stated time interval.C = Market value of the call option.P = Market value of the underlying asset.E = Exercise price (strike price).Call Options11-3ExpirationWould like to find value hereBut first need to determine value here11-4Value of call option at expiration, E = $100P < EP = EP > Ee.g., P = 90P = 100P = 110C = 0C = 0C = P – Ee.g., C = 10out-of-the-money at-the-moneyin-the-money11-5If C < P - E at expiration Suppose P = 110, E = 100, C* = 6.Arbitrage:Buy Call-6Exercise-100Sell Underlying+110Arbitrage Profit+4Arbitrage Guarantees That C = P – E11-6Case of C > P – E:Suppose P = 110, E = 100, C** = 17.Arbitrage:Write Call+17Exercised+100Buy Underlying-110Arbitrage Profit+711-7Value of call option before expiration, E = $100P < EP = EP > Ee.g., P = 90P = 100P = 110C > 0C > 0C > P – Ee.g., C > 1011-8ArbitrageArbitrageFeasible call pricesCP – EPPECall Option Bounds11-9Time 0Write Call+CBuy Underlying-PC – P > ExpirationP < EP = EP > ESell Underlying+P+P = ECall Exercised+ENet+P+E+EArbitrage if C > P11-10ExpirationDetermine Profit or Loss Overlooking Dividends and InterestTake a positionClose entire positionProfit Profiles11-11ExpirationBuy or Call-4Close: Exercise if in-money. Let expire if out-of-money.11-12-4- 4Price of underlying at expiration98 100 102 104Buy call-4Exercise call at expirationSell underlying acquiredfrom exerciseNet profit = - C -4Net profit = – C – E + P-2 -4-100+102-4-100+104Profits or Losses for Call Buyer11-13$P at Expiration+ProfitCall in-money-Loss-4Call out-of-money100E104Buy CallProfit Profile for Buying a Call11-14...
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This note was uploaded on 06/07/2011 for the course FIN 4243 taught by Professor Dudley during the Spring '08 term at University of Florida.

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CH11 - 11-1Put and Call OptionsChapter 1111-2A call option is the right to buy an underlying security at an exercise(strike price during a stated

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